Sound Advice

Market Perspective Turbulence on Wall Street is a periodic occurrence that regularly punctuates the ongoing upward path of progress.   More often than not, there is a retreat of 10% to 15% during the year and less frequently, price pullbacks are even more pronounced.   Recent examples of the latter took place during the closing quarter of 2018 as well as the opening months of 2020.   In both cases (as always happens), the rebounds that followed carried stock prices to even higher levels. The current slippage will follow the same pattern. For an extended period, we’ve pointed out the frothiness of market valuations, but stretched valuations alone do not ignite downturns in prices.   Indeed, excesses tend to last far longer than might appear justified.   What triggers pullbacks are events that threaten to impede economic progress.   Rising interest rates, international tensions, significant negative business developments, and yes, the current pandemic, ...

The January Effect What Wall Streeters refer to as the January effect focuses on both likely market performance during the year’s starting weeks and how that may set the direction for the remainder of the year.   Several studies that have examined historical numbers suggest that January does indeed lead the way to what’s ahead.   That suggestion, however, is less than compelling. No doubt, there is a strong upward seasonal bias during the colder months.   A review of market returns over the last five decades clearly shows that the first and fourth calendar quarters of the year, on average, account for two-thirds of the recorded annual gains.   It does not, however, clearly demonstrate that any one month stands out. Those who follow the January Effect theory argue that the yearly opener favors small company stocks.   Although there is some evidence that may have been the case quite a while back, that’s no longer true. Others pay less attention to the diff...

Dow Jones Industrial Average: Up 62 times in 48 years From the low of 577.60 on December 6, 1974, the Dow Jones Industrial Average has advanced by more than 60 times.  Thanks to the OPEC oil embargo of that time (the first of two), a contraction of the U.S. GDP, and interest rates climbing into the teens, the leading market averages dropped more than 45% from January, 1973 to the closing weeks of 1974. Is the current situation similar? Hardly.   Oil supplies are plentiful.   Energy sources other than fossil fuels are becoming more important.   Economic activity, although still constrained by supply disruptions, is brisk and likely to accelerate.   Interest rates remain near historic lows and even with probable increases over the next few years they will stay below levels that had prevailed over many decades. Yes, stock valuations have been high, but in the absence of a trigger event that could derail the ongoing progress of the corporate community, the p...

Where do we go from here?   When you consider the wide variety of factors that impact the economy and the investment markets, it would be unrealistic to be encouraged by prospects for the next few years.  Yet, although opportunities for continued progress may be more limited, there are always some worth considering. Let’s put this in perspective.  Following the 23 trading days of The Pandemic Plunge, which saw prices collapse by 34%, the Standard & Poor’s 500 Index then rebounded 113% by the most recent December 31st.  On that date, the forward price-earnings ratio of stocks in the index had risen to a lofty 21.2 compared with a 25-year average of 16.8.  (That ratio is calculated by dividing the latest level of the index (4,766) by the estimated earnings of the included companies for the next 12 months .)  By all measures, that’s a hefty valuation, one that’s even more so since it depends on estimates of what’s to come, which are anything but assu...